ABS

Price dislocation in the CDO market has not only halted new issuance but has made the value of existing CDO securities almost impossible to assess. In an effort to address these valuation issues, Moody's Investors Service's Wall Street Analytics (WSA) recently launched Credit Values DCV (Discounted Cash Value), a product the rating agency hopes will enhance the transparency of CDOs by providing investors with valuation information about their securities.

Doubt over the monolines' triple-A-rating stability has been the subject of negative headlines since last summer. While a downgrade would have a dire effect on a guarantor's business model, particularly in the municipal bond market, which is especially dependent on the triple-A guarantee, there may be capital financing alternatives, market participants say.

Perhaps the most surprising element of the escalating concern about mispriced and hidden risk in financial markets is the lack of focus on derivatives - so far.

The Internal Revenue Service's proposed changes to commercial real estate mortgage investment conduits will offer more flexibility for borrowers looking to modify their loans and bring the regulations up to date with today's market, according to proponents of the adjustments.

The SIV unease continues to unfold with more drama. Moody's Investor Service announced recently that 16 SIVs, holding approximately $30.3 billion of debt securities, have been placed on review and face possible downgrade. Among the carnage are some of the more established vehicles from veteran players like Citigroup, Rabobank and HSBC. The negative news sent pricing spreads spiraling out to crisis-mode levels.

The one-time giant among U.K. mortgage lenders, Northern Rock, which holds a fifth of all residential mortgages, continues to find itself hobbled. Despite continued assistance from the Bank of England and impending takeover bids, the fate of the bank's Granite master trust is now facing dark predictions.

Fitch Ratings' second annual Emerging Markets conference, held recently in London, started off positively enough. While presenting slide after slide of optimistic news for investors looking for potential opportunities in the sector, the rating agency noted that in 2007 most sovereign ratings of countries with active ABS markets were listed as "positive."

Once exclusively available to the well-to-do, credit has been descending the socio-economic ladder in Mexico and Brazil during the past few years. Easing interest rates and healthy growth, among other factors, are inducting more low-to-middle income borrowers into the credit culture club of Latin America's two bulkiest economies.

Walled in between the widespread perception of contagion in the financial markets and a long list of announcements of writedowns and layoffs, securitization industry professionals found themselves confronting another quiet week of productivity.

Aiming to create what it calls "a single family of global indices," Markit has acquired International Index Co. and agreed to acquire CDS IndexCo, in what will be the biggest and most important acquisition the company has made to date, according to Kevin Gould, executive vice president at Markit.

The coming months will likely bring an unprecedented amount of new litigation concerning asset-backed securities (ABS) and mortgage-backed securities (MBS) issued over the past two years. Disappointed investors are likely to pursue remedies on the strength of a variety of legal theories. Two concepts appear to be the most interesting at this point: (1) deficient disclosure about the trend of deteriorating loan quality and (2) deficient disclosure about the release of excess spread.

In what seems like an endless stream of write-downs on subprime RMBS and ABS CDO holdings, banks have had to revaluate their positions in the structured finance market, which lately means personnel reorganizations. But not all market participants are convinced that an internal restructuring will help solve the banks' problems.

While the subprime bullet has only nicked domestic issuance in Latin American structured finance, and there's plenty of liquidity among local investors to shrug off the crunch abroad, the cross-border front has been struggling to hop back on the rails.

When Citigroup announced on Nov. 4 that it anticipated the fair value of approximately $55 billion in subprime exposures would decline somewhere between $8 billion and $11 billion, the imprecise estimate highlighted a problem faced by participants in the structured debt market. It also underscored the need for a better way of valuing certain asset- and mortgage-backed securities.

The Italian Bersani Decree, which eliminates prepayment penalties on certain mortgages, has set off the highest rate of prepayments since 2000, according to Standard & Poor's. The bump is providing some lift to investors in an otherwise sluggish European ABS sector.

The asset-backed securities market in Europe is still on a roller coaster ride. Last week, Moody's Investors Service announced that it may downgrade a series of SIVs that include some senior sponsors, while Standard & Poor's upgraded 13 tranches in 10 U.K. nonconforming RMBS 2004 and 2005 vintage deals.

Lewtan Technologies, a company that provides data and workflow services to the ABS industry, unveiled its latest analytics tool for the global securitization industry last Friday. The structuring assistant is software for those who wish to run analytical models of just about any type of ABS deals.

Times are changing quickly for the student loan ABS sector, both externally and internally. While the asset class continues to attract attention from investor groups that are shying away from MBS products, lenders and secondary market financing sources are making progress in the way student loans are originated and securitized.

The market material adverse change clause, or "market MAC," gives banks the ability to walk away from their obligation to syndicate or hold debt if further deterioration of the credit markets takes place. Market observers have seen a return of the once-typical clause, but they say it has yet to establish staying power.

Plenty of criticism has already been lobbed at the rating agencies, and panelists at IMN's ABS East conference in Orlando certainly did not spare them any fault.